Payment of Insurance Claims

There is something that can be done that will help all Californians through the present insurance crisis. There is an Assembly Bill 3554, which is a start in the right direction. The intent of the bill is to set up a State Liability Insurance Fund for local governments. Initially the fund was to be the exclusive source of insurance for liabilities in excess of $1 million. For reasons unknown, the exclusive feature has been removed.

It should be understood that it is a complete waste of money for any public entity to buy insurance from the commercial insurance companies. Between 30% and 50% of the premium spent over an extended period of time is the cost of running the commercial insurance system over and above the losses paid. A government-operated pool should be able to perform the same function for 5% or less.

A state-run pool starting in excess of a minimum $25,000 deductible, which could be increased for larger entities, should take care of the problem. The pool manager would set rates and premiums based on past experience and risk exposure. The entities should be encouraged to form their own pools when possible. These pools could then buy their excess insurance from the state pool. Any entities that did not want to or could not join the smaller pools could insure directly with the state pool.

The state pool or the smaller pools should provide all types of insurance that the governmental entities need. This would include property insurance as well as liability insurance and excess workers compensation. The reason to include property insurance is that it has more waste than most other types of insurance.

Rather than mandate that all government entities in California have to buy insurance from the pool, a law should be passed that makes it illegal for them to buy commercial insurance. They can go bare, pool with other entities or purchase insurance from the state pool but could not buy commercial insurance.

There are two major advantages to this approach. One, the public entities will save many millions of dollars. Two, such a move will free up insurance capacity so that it will be easier for businesses and individuals to find affordable insurance. Therefore the public gains both as a taxpayer and as an insurance consumer.